A Guide To Car Loans And Vehicle Finance Deals
Cars are expensive purchases and when you’re looking at a gleaming new set of wheels, you can quite easily get emotionally involved in the purchase. This is why it’s so important to know what type of finance or loan will best suit your needs prior to visiting the forecourts.
*Please note options do change so keep an eye on special offers, etc.
Perhaps the simplest option is to go for a personal loan from a bank. APR (Annual Percentage Rate) can vary, but essentially the way this works is the interest you pay on the amount you borrow.
These are normally to a maximum value of £25,000 and over a ten year repayment period. One thing to note is that your credit status can dictate the maximum value you can borrow along with the APR itself.
A better credit rating means you’re more likely to have to pay less in the long run as there is less risk for the loan provider.
Check the APT as this makes a huge difference.
This type of loan is secured against a property so you’d need property to secure it against. A longer repayment period and a higher maximum value can be borrowed with this type of loan but obviously comes with the risk that you property could be repossessed by the bank should you default on the loan! Not really worth risking your home for an expensive car.
Generally speaking, when you go to buy a new or used car, the dealer will either have their own credit provider or be linked with an established company. When a dealer offers you credit, look over all of the paperwork very carefully. You may find it a good deal, or alternatively choose to arrange a loan through your own bank, depending on what sort of APR is being offered.
PCP (or Personal Contract Purchase) is an alternative way to buy a car. It’s actually a good way to get a higher priced vehicle but at a cost. Simply put, PCP can be better for some people as it includes road tax, sometimes maintenance too and comes with fixed monthly payments that are quite often lower than other forms of finance.
The drawback comes from the fact that once you paid off the initial period, there’s a balloon payment at the end, called an ‘optional final payment’. It’s at this point that you can hand the car back, pay off the money and keep the car or use it as a deposit on a new vehicle.
The choice is entirely yours. Overall, PCP tends to come with lower monthly costs associated but a higher total payable when the optional final payment is taken into consideration.
Fees To Consider
When organising a loan, sometimes you’ll find there are ‘hidden’ costs. A good car dealer if being arranged on the day of purchase, should discuss with you all of the options and where additional costs are accrued on the loan.
Here’s a breakdown of some of those additional costs when arranging finance:
- Application fee: A fee that is charged when applying for the loan
- Arrangement fee: Normally added to the cost of the loan when your credit has been checked and agreed
- Courier fee: Depending on what is required, some companies will charge a courier fee.
- CHAPS fee: Clearing House Automated Payment Service – a way to transfer money from one bank to another, quite often in a single day.
- Early settlement fee: Some companies charge if you settle the loan early, as it means they won’t be getting the full interest. This tends to be based around the amount of interest remaining so depends on the value of the loan
- Optional final payment: Should you choose the option of PCP, the optional final payment is the lump sum you pay at the end in order to keep the car
Other things to consider
Understanding Car Loan Interest Rates
When purchasing a car, unless it is brand new, it is recommended to run a vehicle data check. It’s fairly cheap to do could well help you spot a bad buy.
Consider putting down a larger deposit. This will reduce your monthly repayments when it comes to your loan, which can be very useful.
Perhaps most importantly when considering finance, choose the right car for you. Remember that you are getting into debt for what could be a significant amount of money so it is important that you’re happy with your purchase.
Should the worst happen and you fall behind on your payments, do not panic. Talk to the loan provider, they may be able to arrange something to help you. Alternatively, seek financial advice from a specialist, your bank and the Citizens Advice Bureau.
One thing almost everyone does at some time in their life is take out a loan to buy a car. While everyone wants an attractive low interest rate few people know the factors used to determine the rate they receive. For the institution financing any loan comes down to a simple question: What is the likelihood default? The method used to determine the likelihood of default is made up of many variables; some are within your control and some are not.
Within your control is the first determining factor your credit score. Your credit score is basically your payment history on other debt converted into a number. This number represents what kind of risk based on your payment history it is to loan you money. The second is your debt to income ratio. To understand this ratio you must add together your pre-tax income from all sources and multiply it by 36 percent. This 36 percent is the amount of money you have to pay your monthly debt. From that total you must subtract all of your current monthly debt payments such as rent or mortgage, credit card payments, and other loan payments. The amount left over is what you have available to pay a car loan. The higher the loan takes you to the threshold of that 36 percent the higher a risk you are.
Other factors you control are the car you choose and how long you will take to pay the loan back. Used car loans have a higher interest rate than new car loans. Used cars are more likely to have owners throw up their hands and walk away because of problems with the vehicle. Often people stretch out the payments on vehicles they cannot really afford to fit within their debt to income ratio. Longer loan terms increase your interest rate because being under burdensome debt becomes exhausting and many people just give up. The longer you have to pay for something the more likely you are to default.
Affecting interest rates outside your control is the prime lending rate set by banks. The prime rate represents the lowest interest rate offered for a type and length of the loan. Any conditions other than optimal on your part drive the rate up from there. Although each bank sets its own prime rate they all follow the Federal Reserve rate, after all a bank cannot loan you money for less than they are borrowing it for. Fortunately, the current trends of the Federal Reserve rate with car loans following is to keep interest rates low and loans fairly easy to secure. Loan rates have dropped and remained constantly low for the last couple of years and by all indications will remain low through the rest of 2013 and beyond.
If you are not able to secure the rate you wish understand that most car loans are simple interest loans. Simple interest is calculated using only the amount of principal owed each day. This means you benefit greatly and reduce the total amount of interest you pay over the life of the loan by making any additional contribution towards the principal. If you intend to make additional contributions towards the principal and paying the loan off early be sure to ask if there is any prepayment penalty.